After more than a year of essentially no action on NGV-related legislation, two bills were recently signed into law, moving the ball forward for natural gas vehicles: the National Defense Authorization Act and the Tax Increase Prevention Act of 2014.
While the Tax Increase Prevention Act is pretty straightforward -- extending a series of tax credits that expired in 2013 -- I'm sure many of you are wondering what a defense authorization law has to do with NGVs. Let's look at these pieces of legislation, what they mean, and how they benefit the different players in the NGV business.
Tax Increase Prevention Act: VETC is back... sort of
Volumetric excise tax credits, or VETCs, have been provided regularly to natural gas vehicle users and/or fuel sellers for years, to both help establish natural gas as competitive with gas and diesel and incentivize users to switch to an almost wholly domestic fuel.
The VETC, however, has been a political football the past several years, with the tax credits not put in place at the beginning of 2012, 2013, or 2014. However, the VETC eventually was passed at or near the end of each year, and made retroactive. Nonetheless, a lack of certainty persists. Since many fuel providers offer to discount their prices up front and claim the credits, operating without a guarantee that the credits will be reimplemented can put them at risk for serious losses. For those NGV users -- especially the largest fuel consumers -- who calculate VETC as part of their financial modeling, these credits can play an important role in the financial justification of going with NGVs versus gas- or diesel-powered vehicles.
How big an issue is it? I reached out to Clean Energy Fuels (NASDAQ:CLNE), the country's largest seller of natural gas for transportation, to get some idea of how the law will impact the company. Clean Energy delivered 192.7 million gallon-equivalents of natural gas in the first nine months of the year, putting it on track to deliver some 250 million GGEs for all of 2014.
According to Clean Energy investor relations, the company expects to receive approximately $25 million-$28 million in credits for 2014, which it will recognize in the fourth quarter. That's a significant amount of money the company essentially "fronted" to refueling customers, with the expectations that VETC would be reinstated.
Defense Authorization Act adds CAFE credits
A senator from Oklahoma -- in the heart of the natural gas business -- and a senator from Michigan -- the center of America's automotive industry -- were instrumental in inserting the provision that expands CAFE (Corporate Average Fuel Economy) credits for natural gas vehicles into this act. Oklahoma Senator James Inhofe is the senior member of the Senate Environmental and Public Works Committee and ranking member of the chamber's Armed Services Committee, while Michigan Senator Carl Levin chairs the Armed Services Committee.
The benefits to these two senators' constituencies are clear: Oklahoma's gas interests will benefit with increased demand for vehicle fuel, while Detroit automakers would benefit from increased demand for NGVs. But how does this benefit the national defense?
In short, natural gas is a domestic fuel, while the majority of the U.S.' gas and diesel comes from imported crude oil. Considering the hundreds of billions of dollars it has cost to maintain American security interests in the Middle East over the past four decades -- quite frankly because of oil -- it's not as far-fetched as it might seem for this provision to be made part of this particular law.
Upside for refuelers and automakers
While American automakers such as Ford (NYSE:F) and General Motors will see some small upside, natural gas vehicles will remain a very small market for these companies -- at least in the near term. Natural gas engine technology specialist Westport Innovations (NASDAQ:WPRT), however, could see some larger benefit, as it is Ford's largest qualified vehicle modifier partner, providing natural gas versions of F-Series trucks and Transit and Transit Connect vans. Westport won't gain any direct financial benefit from the CAFE expansion, but if the credit does increase Ford's focus on NGVs, increased sales of these vehicles would be a big win for Westport.
On the refueling side, the VETCs definitely benefit Clean Energy Fuels, which is one of the few "pure play" investments in natural gas vehicles. If it can consistently pick up an extra $0.10 per gallon in profits from VETCs going forward, that's a win. If the new Congress can make VETCs permanent, or at least extend them for several years, that could push more fleet owners to buy NGVs. That's a bonus for Clean Energy, and for Westport as well.
Taxes are not a good foundation for an investment thesis
It's probably a bad idea to put too much emphasis on tax credits as part of your thesis for investing in a company. Westport and Clean Energy are both spending more money than they are making right now, and tax credits like the ones cited above can't be counted on as predictable sources of future income. I own shares of both companies, but in small amounts that won't cause any serious harm to my portfolio if they don't pan out as investments. Either way, I'm not relying on tax legislation as being central to their success or lack of it.
Both companies have plenty of promise but also face significant challenges, meaning higher risk if you invest. These new incentives are nice, but it's important to understand the fundamentals of the business both with and without the benefits of tax credits that might not be around every year. Take a deeper look at the fundamentals before deciding how these companies fit into your investing plans.